Why are construction companies missing out on R&D?

As a proportion of GDP, construction is the UK’s second largest sector. Yet when it comes to claiming R&D tax credits, construction ranks second from lowest in the table. Is it really due to a lack of innovation – or are construction firms missing out? Our recent real estate seminar identified the key issues.

If statistics on R&D tax credits are taken at face value, construction companies don’t ‘do’ R&D. Construction firms account for less than 3% of the overall R&D Tax Credits awarded to UK businesses every year: a figure that’s at odds with construction’s place as the UK’s second largest sector.

Ask the vast majority of construction professionals and they will say the same thing: aside from the occasional research and development project, R&D just isn’t a significant part of the industry. A Mark Farmer report on construction sought to corroborate this, highlighting the industry’s lack of R&D claims as evidence that construction firms simply aren’t investing in innovation.

Matt Watts, head of Smith & Williamson’s R&D Tax Credit team, knows this is not the case and at the recent seminar he addressed the real reasons that construction businesses are failing to claim R&D tax credits at our recent real estate seminar: 'R&D Tax Credits in the construction industry – are you missing out?'.

Culture and self-perception

There is a huge amount of R&D in the sector, but the industry’s culture is holding companies back from claiming. Companies are dealing with areas of technological uncertainty, the key requirement for R&D tax credits, on a regular basis and yet the perception of this activity as ‘workaday’ and ‘just part of the job’ prevents companies from identifying innovation within their business.

Hidden R&D

As such, most of the eligible R&D within building and construction businesses is hidden. While a pharmaceutical or technology company will have a specific budget dedicated to research and development, in construction eligible expenditure is often spread across a variety of different activities and departments.

We are speaking with a number of construction companies to ensure that they are not missing out on this valuable tax relief. A recent example is a business which is using a tried and tested construction method but is having to do it on a much larger scale than has been attempted in the past. As a result the company has had to consider new ways to resolve certain issues and problems, and this activity is qualifying R&D. If we had not reviewed the various different projects which the company is working on, then this could have got missed and valuable relief not claimed.

Communicating complicated ideas

When R&D is identified, it’s often found in the most technical areas of the business. As such, communicating projects effectively to HMRC can be difficult. According to Matt Watts, technical knowledge is improving all the time in HMRC’s R&D unit, but it’s still crucial for businesses to be able to communicate what technological difficulties were encountered, and what the company did to overcome them.

Resistance from senior personnel

If a claim isn’t explained clearly, HMRC will ask further questions – a prospect that most business owners are keen to avoid. But this is where the team at Smith & Williamson can help: Matt is a member of HMRC’s own consultative committee for R&D, and therefore the team understand how to mitigate the risk of HMRC asking further questions. Combined with a general lack of awareness and cynicism around the process, advisors can face considerable resistance from business owners at the start of the R&D process.

Overcoming that resistance is about asking the right questions. Once they see that R&D is happening in their business, and could result in a valuable tax relief, that resistance quickly turns to enthusiasm.

Are you missing out?

If you think your construction business could be missing out on valuable R&D tax credits, contact Matt Watts, head of Smith & Williamson’s R&D Tax Credit team. You can find out more about R&D in construction in our overview, Why does the UK’s construction industry not capitalise on R&D tax credits? along with answers to some our most frequently asked questions.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.